Goldman Sachs says China's debt poses a 'sustainability risk'

China's debt has been undercalculated and the true extent of the
country's leverage "increases our concerns about China’s
underlying credit problems and sustainability risk," according to
a note from Goldman Sachs analyst MK Tang and his team.

Tang writes that about 6 trillion RMB (about $900
billion) more credit was issued to households last year than was
captured in formal statistics for China's financial institutions,
according to a Goldman analysis of the "shadow banking" sector
— the facilitation of a line of credit across the
global financial system which is unregulated.

That's the equivalent of 9 percentage points of GDP.

Here is how that looks in a chart. The light blue columns
represent the official numbers, the dark blue line represents
Goldman's estimate of what's really going on:

Goldman
Sachs

When you plot that debt against China's GDP, it looks like
this:

Goldman
Sachs

Tang uses some scary language (emphasis in the original):

More worryingly, our implied credit metric indicates that
the trend of China’s leverage has probably deteriorated
faster than we previously thought, even though we had
already expected the ratio to continue rising in the next few
years (see here). Compared to our previous estimates, the
experience in 2015 suggests that the economy’s dependence on
credit has deepened significantly and that it likely needs
sizeable flow of credit on a persistent basis to maintain a
stable level of growth.

... Such a scale of deterioration certainly increases our
concerns about China’s underlying credit problems and
sustainability risk. The possibility that there is such
a large amount of shadow lending going on in the system that is
not captured in official statistics also points to regulatory
gap, and underscores the lack of visibility on where potential
financial stress points may lie and how a possible contagion may
play out.

Goldman is not predicting some sort of looming systemic disaster.
In fact the report makes no predictions at all.

But if Goldman is right, the consensus case — that China will
once again muddle through — just got a bit harder. Tang calls it,
"an uncomfortable trend that has gotten more discomforting."